Stocks' Winning Streak Broken, but Long-Term Outlook Positive
by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
January 31, 2011
For several weeks, we have suggested that the macro market backdrop has been dominated by global bullish forces in conjunction with localized bearish ones, a description that largely explains last weekās stock market action. Early in the week, headlines surrounding European debt issues and US municipal budget concerns faded somewhat, and risk assets (particularly stocks) experienced strong performance. Toward the end of the week, the Egyptian protests and resulting political turmoil unnerved investors, causing stock markets to experience a sharp decline. Stocks were down for the week, with the Dow Jones Industrial Average experiencing its first decline after eight weeks of gains, falling 0.4% to 11,823. The S&P 500 Index and the Nasdaq Composite also declined, losing 0.6% to 1,276 and 0.1% to 2,686, respectively.
The situation in Egypt has reminded investors that geopolitical risks are always present and in this case uncertainty is high, both in terms of what will happen and what the potential impact will be. Investors are questioning whether any degree of calm can be restored, what the political future of Egypt will be, how stable the government is (and will be) and, of course, whether the unrest in Egypt will spread to other parts of the Middle East.
Meanwhile, back in the United States, the preliminary fourth-quarter 2010 gross domestic product (GDP) report was released, showing that the US economy grew at an annualized 3.2% rate, representing an acceleration over the third quarter. Importantly, many of the details within the report were stronger than the headline number. Final sales increased by an annualized 7% rate, consumer spending advanced by 4.4% and strength also emanated from export increases and business equipment and software spending.
So far, economic growth in the first quarter of 2011 has been negatively impacted by a rash of bad weather in many parts of the United States, but we believe that the positive momentum from the fourth quarter means that any disruption is likely to be only temporary. We continue to expect overall 2011 GDP growth to be on the order of 3.5%. Getting to that level will require less restrictive bank lending policies (which we have begun to see) as well as improvements in the labor market (which we are expecting to see).
In this environment of improving (but still fragile) economic growth, many are wondering when the Federal Reserve will consider adopting tighter monetary policies. In our view, the Fed appears to be awaiting economic growth that is stronger than 3.5%, a more significant decline in unemployment and rising expectations for inflation. In our opinion, we are still quite a bit away from such an environment.
Last week also featured President Obamaās State of the Union address to Congress. In his remarks, the President reiterated many of the points he has been raising over the past several months, but he did not offer much that was new in terms of economic policy. The White House appears to be betting that it can appeal to political centrists by upping the use of free market rhetoric, making some personnel changes and highlighting meetings with business leaders without actually proposing significant policy changes. One striking absence from the State of the Union address was a focus on rising deficitsāhigh levels of deficits was an important political point in last Novemberās midterm elections, and it was somewhat surprising that this issue was not more prominently addressed in President Obamaās remarks.
At present, most investors appear to have increased their expectations for global growth and for growth levels in the United States. The words ādouble dipā have virtually vanished from investorsā vocabularies and while we agree with the generally optimistic tenor of the conversation, we are also somewhat uneasy about the positive shift in sentiment and growing sense of complacency. As last weekās events remind us, there are a number of risks to be wary of, including one we have not yet mentionedāmonetary tightening in emerging markets. While we continue to believe that the global bullish forces will dominate market action over the course of this year, we also believe that at some point we will experience a market pullback, and the declines toward the end of last week may represent the beginning of one.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRockĀ® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock's Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
Sources: BlackRock; Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 31, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
